Trade of the Day: PepsiCo (PEP)

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Stocks mostly fell on Monday in a quiet session that consolidated gains seen in last week’s rally. Treasury bonds were flat, and the U.S. dollar was stronger. As for commodities, crude oil finished flat after a volatile session, and most industrial and precious metals came under pressure in sync with the dollar.

The biggest headline of the day came from the deal-makers as Pfizer Inc. (PFE) and Allergan PLC (AGN) agreed to form the largest merger in the pharmaceutical industry’s history. The move will push Pfizer’s tax rate under 20%.

In other news, the November Markit Purchasing Managers’ Index (PMI) showed that U.S. manufacturing dipped from its October status to its lowest level in two years. This number is a little bit volatile — but, at minimum, it shows that factories are not roaring as we prepare to exit 2015.

Also disappointing was October existing home sales. They fell 3.4% from September, and the median price was also lower. The U.S. existing home sales came in at a 5.36 million seasonally adjusted rate, versus expectations of 5.4 million and last month’s 5.55 million. The median price logged in at $219,600 versus last month’s $221,900 and last year’s $207,500.

On the positive side of the ledger, November flash eurozone PMIs were a little better than expected — both above consensus and above October’s levels.

So, there were no major catalysts for the action, but most sectors finished lower. Consumer staples like PepsiCo, Inc. (PEP) and Altria Group Inc (MO) fared best as a risk-off trade.

Pepsi also benefited from an upgrade by Nomura (NMR). Here were Nomura analysts’ reasons for the lift in rating, as reported in Barron’s:

  • “Venezuela is no longer an issue: With 3Q results, the company announced that it would deconsolidate Venezuela, which we believe improves the quality of accounting. Additionally, organic revenue growth numbers will be a more meaningful metric going forward.”
  • “We see the U.S. beverage business continuing to benefit from a continuation of rational industry pricing (a 3% gain, versus flat to 1% historically) as well as productivity measures.”
  • “With macro and FX headwinds in emerging markets, along with a likely rate increase in the U.S. in December, we believe Pepsi’s greater U.S. exposure (c. 65% of profits) is a relative advantage in the coming year.”
  • “At 21.4x 2016 earnings, the valuation is at a slight discount to the FMGC average (22.3x), which we believe no longer assumes upside from a potential split in the business.”

Trade of the Day: PepsiCo, Inc. (PEP)

PEP shares rose $10 from late September to late October and then pulled back. Pepsi bubbled up as much as 1.5% on Monday on the Nomura upgrade, and even after the market fell over in afternoon trading, it still closed 0.7% higher. It should be back to its winning ways now, so for today’s trade I’m recommending the calls.

Buy the PEP Dec. 18th $97.50 calls (PEP151218C00097500) at $3.55 limit, good till canceled. Set up to sell half at initial target $4.40 and the second half at final target $4.95. Set a stop at $2.45 limit, good after 10:30 a.m. ET only.

Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Follow him on Twitter for his latest take on markets and innovation.


Article printed from InvestorPlace Media, https://investorplace.com/2015/11/trade-of-the-day-pepsico-pep/.

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